Shonky Award for insurance industry based on solid evidence

01.Floods require help not hinderance

Why CHOICE gave a Shonky Award to the insurance industry

CHOICE made its decision to award the Insurance Industry a Shonky, based on information provided by those dealing face to face with the many consumers who have seen their flood claims denied. In a number of cases, due to unclear wording and because sales people led them to believe they were covered, consumers mistakenly believed they were covered.

Evidence on which CHOICE’s decision was based

We have this information primarily from Legal Aid Queensland (LAQ), in an August 2011 report made available to CHOICE, as well as from interviews with the organisation earlier this year. This was when policyholders were facing what LAQ called “large-scale refusals”. We believe LAQ to be a well-placed, independent and informed source of information.

However, LAQ is not the only stakeholder to draw attention to the longstanding inadequacies of insurers when it comes to being up front with consumers about flood cover; nor is LAQ the only stakeholder CHOICE has talked to or heard from. The issue has also caught the attention of government.

In August this year Australia’s Minister of Financial Services and Assistant Treasurer Bill Shorten said “It is clear the rate of disputes for flood claims is unacceptably and substantially higher than for other natural disasters such as bushfires, cyclones and hailstorms”.

Mr Shorten made the statement after an insurer had reversed a decision not to pay 247 claims in the Ipswich area after new information about water flows had been made available. The policyholders had been waiting six months to find out whether their claims would be honoured.

The minister called on the insurance industry at that time, and earlier, to “deliver a standard definition of flood to ensure policy holders know where they stand and have confidence in the insurance product they are purchasing”.

CHOICE praises insurers who did the right thing by policy holders

CHOICE applauds those insurers and insurance company staff who did the best they could under difficult circumstances. We have cited Suncorp and RACV as two insurers who acted in the best interests of policyholders. The Shonky award is aimed at the many instances in which consumers were not well-served, and we are confident that our sources are correct in saying this is an industry-wide problem.

The Insurance Council of Australia (ICA) has reported that 725 of 130,000 claims have been referred to the Financial Ombudsman Service for dispute resolution. The government estimates that 15% of claims have been denied – or 19,500 claims overall using the ICA’s figure. How many of these denials were the result of confusing policies, misinformation on the part of salespeople, consumer error, or self-serving behaviour on the part of insurance companies is impossible to say at this point. What is clear is that the numbers – 725 and 19,500 – are too high.

The way forward

Our recognition of poor service to consumers on the part of insurance companies is also the culmination of long-term focus on the issue and a call for many of the measures the ICA is now proposing to adopt. Our understanding is that the ICA’s proposal for a “voluntary common definition” of flood in 2008 was rejected by the ACCC on the grounds that there would be no overall public benefit and that the proposal might work to the advantage of insurers more than policyholders.

CHOICE supports the ICA’s continued involvement in devising a single definition that’s fair to consumers, as well as a Key Fact Sheets clearly outlining what events policies do and do not cover. We only wish these measures had been in place prior to the summer 2011 floods.

As we point out in the Shonky 2011 story, “some policyholders failed to read their policies carefully”. Consumer education is a longstanding priority for CHOICE, and one that we will continue to pursue as both industry and government seek a more secure and transparent deal for policyholders looking to avoid financial catastrophe in the wake of flood events.

CHOICE made its decision to award the Insurance Industry a Shonky, based on information provided by those dealing face to face with the many consumers who have seen their flood claims denied. In a number of cases, due to unclear wording and because sales people led them to believe they were covered, consumers mistakenly believed they were covered.